The CEO Of Fannie Mae Had A Startling Response To Being Told His Firm Couldn't Handle More Risk

Fannie Mae's CEO might have revised his 2007 response to his chief risk officer had he known that he was reprimanding the CRO for suggesting that Fannie *not* take on the risk that would ultimately require a bail out.

Instead, as the FCIC's report on the causes of the financial crisis shows, CEO Daniel Mudd told Enrico Dallavecchia to come to his office, where he could whine man-to-man.

Fannie had just presented its 5-year plan to take more credit risk and told the board -- without consulting Dallavecchia about the plans -- that Dallavecchia's risk department was fully equipped to handle and manage the risk.

But Dallavecchia did not think his department could handle the risk, and though he wasn't ever asked to give his opinion, he made it clear in an email to Fannie's COO. He wrote that Fannie had “one of the weakest control processes” that he “ever witnessed in [his] career, . . . was not even close to having proper control processes for credit, market and operational risk,” and was “already back to the old days of scraping on controls . . . to reduce expenses.”

Surprised that Mudd was so presumptuous, Dallavecchia e-mailed Mudd after the board meeting and told him that he was very "upset" that he had to be the last one to know about the 5-year plan to increase credit risk, and that he did not agree that Fannie would be able to handle the risk.

Mudd replied:

“My experience is that email is not a very good venue for conversation, venting or negotiating. [If you feel that you've been dealt with in bad faith, you should] address it man to man, [unless you want me] to be the one to carry messages for you to your peers.”

“Please come and see me today face to face.”

Those are harsh words to hear from your boss when you're (it turns out) raising valid concerns. He has a point about saving criticism or serious discussions for a man-to-man talk, but a simple "please come see me," would have sufficed.

In June, Fannie prepared its 2007 five-year strategic plan, titled “Deepen Segments—Develop Breadth.” The plan, which mentioned Fannie’s “tough new challenges—a weakening housing market” and “slower-growing mortgage debt market”—included taking and managing “more mortgage credit risk, moving deeper into the credit pool to serve a large and growing part of the mortgage market.”

Overall, revenues and earnings were projected to increase in each of the following five years. Management told the board that Fannie’s risk management function had all the necessary means and budget to act on the plan.

Chief Risk Officer Dallavecchia did not agree, especially in light of a planned 16% cut in his budget.

In a July 16, 2007, email to CEO Mudd, Dallavecchia wrote that he was very upset that he had to hear at the board meeting that Fannie had the “will and the money to change our culture and support taking more credit risk,” given the proposed budget cut for his department in 2008 after a 25% reduction in headcount in 2007.

In an earlier email, Dallavecchia had written to Chief Operating Officer Michael Williams that Fannie had “one of the weakest control processes” that he “ever witnessed in [his] career, . . . was not even close to having proper control processes for credit, market and operational risk,” and was “already back to the old days of scraping on controls . . . to reduce expenses.”

These deficiencies indicated that “people don’t care about the [risk] function or they don’t get it.”

Mudd responded, “My experience is that email is not a very good venue for con- versation, venting or negotiating.” If Dallavecchia felt that he had been dealt with in bad faith, he should “address it man to man,” unless he wanted Mudd “to be the one to carry messages for you to your peers.”

Mudd concluded, “Please come and see me today face to face.” Dallavecchia told the FCIC that when he wrote this email he was tired and upset, and that the view it expressed was more extreme than what he thought at the time.